Islamic Commercial Law: An Analysis of Futures and Options focuses on options and futures as trading tools and explores their validity from an Islamic point of view. Futures and options are a completely new phenomenon which has no parallel in Islamic commercial law. After reviewing the existing rules of Islamic law of contract and verifying their relevance or otherwise to futures trading, the author, Professor M H Kamali, advances a new perspective on the issue of futures and options based on an interpretation of the Qur’an and the Sunnah and referring to the principle of maslaha (consideration of public interest) as enshrined in the Shari’ah. Islamic Commercial Law consists of three parts. Part One is devoted to the description of futures trading and the understanding of operational procedures of futures and futures markets; Part Two investigates the issue of permissibility of futures trading in Islamic law and the underlying questions of risk-taking and speculation, which are of central concern to the topic. Part Three is devoted to an analysis of options. This work will be of use to anyone working on Islamic law, comparative law or working in Islamic banking.

Dr Mohammad Hashim Kamali is Professor of Law at the International Islamic University Malaysia where he has been teaching Islamic law and jurisprudence since 1985. Among his other works published by The Islamic Texts Society are: Principles of Islamic Jurisprudence, Freedom of Expression in Islam, Islamic Commercial Law, and Freedom, Equality and Justice in Islam. 

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Table of Contents

Excerpt from Book:

Introduction

Islamic commercial law has often been singled out as the most important area of contemporary research in relevant Islamic studies and has, in terms of overall priority, been given an even higher rating than research in applied sciences and medicine. This is due to the critical importance of commercial transactions in the generation of wealth and the prospects of productivity in contemporary Muslim countries. New research on issues of the conventional law of commercial transactions (mu’amalat) is essential for the viability and success of economic development programmes in Muslim countries. In recent decades, research interest in the law of mu’amalat has increasingly focussed on specific themes and the development of new operative formulas to stimulate profitable business in the market-place. Futures trading is one such theme wherein original, independent juristic reasoning (ijtihad) is evidently required to enhance the prospects of economic success, especially in farming and agro-based industries, in developing Muslim countries.

Large-scale futures trading is a relatively new phenomenon which emerged in the early 1970s and has rapidly expanded ever since. New products and trading formulas in the various sectors of trading in commodities, options, financial futures and stock index futures, etc., have increased so much that futures contracts are currently available in over eighty commodities ranging from foodgrains, oil and oil seeds, sugar, coffee, livestock, eggs, orange juice, cotton, rubber, precious metals and currencies. In terms of trading volume, futures trading has far exceeded trading levels in conventional stocks, and it is currently the single most voluminous mode of commerce on the global scale.

Futures trading is economically beneficial because it facilitates better production planning in the agriculture and agro-based industries. In these sectors it is also utilised as a hedging device against violent movement in the price of commodities over a period of time which, in the case of agricultural produce, stretches over crop seasons, often from sowing to harvesting time. Futures trading is also used by food processors, merchants and manufacturers as a means of ensuring sales and purchases in advance, without them having to face the uncertainties of marketing at a later occasion, that is, after harvesting or production, as the case may be.

Furthermore, there is a manifest need for trading and investment vehicles in Muslim countries that could ensure that surplus funds are absorbed and utilised in local/regional markets. One of the most discouraging phenomena of recent decades, namely, that of a flow of surplus funds from the oil-rich countries of the Middle East to the West, is largely due to the absence of adequate investment facilities. In spite of recent developments that have already affected the financial situation of most Muslim/Arab oil-producing countries, such as the loss of revenues due to the decline in the price of oil and the enormous expense of the Gulf War on the countries of the Gulf, this flow of funds to the West continues to threaten the vitality and survival of Muslim economies. In a recent article in The Financial Times of London, Roula Khalaf wrote that ‘acceptance of Islamic banking is growing’, but that the Qur’anic prohibition against receiving or paying interest has meant that ‘about 75 per cent of Islamic banking funds are invested in short term commodity (futures) trades’. The same report estimated that ‘funds invested in an Islamic way in the Arab world may amount to $50 billion – much of it is used for commodity trades’. To give an indication of the place of investment and where the money goes, we further read that commodity trading is conducted ‘in return for a fee by a middleman—often a western bank, like Citybank—that arranges for a trader to buy goods on an Islamic bank’s behalf…and the western banks have always been happy to oblige’.

In view of this, and in the light of the Shari’ah principle of permissibility (ibahah) that renders all commercial transactions permissible in the absence of a clear prohibition, the verdicts of not only the Mecca-based Fiqh Academy but also of many Muslim scholars who have proscribed futures trading and declared it totally forbidden is a most discouraging form of imitation (taqlid). This body of opinion is mainly founded on the analysis that futures trading does not fulfil the requirements of the conventional Islamic law of sale—and turns a blind eye to the fact that futures trading is a new phenomenon which has no parallel in the conventional law of mu’amalat, and should therefore be governed by a different set of rules. This imitative approach also fails to relate the issues at hand to the normative guidance of the Qur’an and Sunnah which can support a different calibre research and an affirmative ruling on the subject. The title of Roula Khalaf’s article, ‘An Inherent Contradiction’, portrays the concern on the part of Islamic banks and investment institutions to observe the letter of the Qur’anic ruling on usury, but also underscores their failure to act for the benefit and prosperity of the Muslim masses. The nature of the problem must be that the Islamic legal advisors to these institutions have limited their understanding of the Qur’an to the literal meaning of the text alone, and have not applied any juristic insight or imagination to the task of alleviating the dismaying economic predicament faced by Muslims. In answer to the question of whether Islamic banks may invest in futures or not, Khalaf tells us that this ‘depends on the bank’s Sharia board, whose members are experts in the Koran but less so in the field of bank options ... It is up to each institution to say what is Islamic’. This is, of course, an expected result of what Khalaf called ‘the absence of a standard interpretation of the Sharia’ and if allowed to continue ‘will dampen further development of the industry’ as a whole and slow down efforts to enable financial institutions in the Muslim world to enhance and diversify their own resources.

This enquiry shall review the existing literature on the subject and then proceed to develop a fresh perspective on it. The central feature of this research will be to offer a different interpretation of the source materials of the Shari’ah as to how an issue of vital importance to the economic viability of the Muslim community should be tackled, namely, not through facile reliance on the negative positions of taqlid, but through bold yet upright approaches to research on issues of Islamic commercial law.

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